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Thursday, February 17, 2011

Foreign Travel Tax - Penalty for delay in payment

Foreign Travel Tax - Penalty for delay in payment – Provisions of Act to take precedence over Rules; Delay in payment amounts to failure to pay; Higher Penalty on Remand?: Bombay HC

MUMBAI, AUG 28, 2010: ALL these petitions filed by the petitioners under Article 226 of the Constitution of India are challenging imposition of penalty under section 38(3) of the Finance Act, 1979 for delay in payment of Foreign Travel Tax ('FTT') to the Government. The facts involved in all these petitions are more or less common and issues involved are identical. Hence all these petitions were heard together and disposed of by this common judgment.

The Finance Act, 1979, which received assent of the President on 10 th May, 1979 contains Chapter V which provides for provisions of levy of FTT under section 35 of the Act on all passengers embarking on the international journey and created liability on the carriers to collect and pay it to the Central Government.

Section 35A thereof created liability on the carrier to pay interest for default in payment of FTT, whereas section 38 in general provides for penalty and subsection (3) thereof, in particular, provides for penalty on the carrier or other person who fails to pay FTT to the Central Government under subsection (2) of section 35. In addition to the payment of such tax and the interest leviable thereon, the carrier is also held liable to pay minimum penalty not less than one fifth, which may extend to three times of the amount of tax not so paid to the credit of the Central Government. Subsection (4) of section 38 provides that in case of breach of any rules by the carrier or other person, he shall be liable to pay penalty which shall not be less than five hundred rupees, which may extend to fifty thousand rupees, and where the breach is a continuing one, with further penalty which may extend to five hundred rupees for every day after the first during which such breach continues. Proviso to section 38 provides that no order for imposing a penalty shall be passed by such authority unless the carrier or other person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.

That being the provisions of the Act, proviso to rule 11 provides that no officer of customs mentioned in Sec.3 of the Customs Act shall be competent to impose a penalty exceeding five thousand rupees in any such case.

All the advocates appearing for the petitioners in one voice urged that under proviso to rule 11 of the FTT Rules, no officer of Customs mentioned in section 3 of the Customs Act is competent to impose penalty under section 38(3) of the Act more than Rs.5,000/. According to them, rule 11 is a part of the statute and it provides for lesser penalty than provided in section 38(3) of the Act. Proviso to rule 11 of the FTT Rules being beneficial to the assessees, it should be given effect to rather than section 38(3) of the Act. In other words, no penalty in excess of Rs. 5,000/could be imposed by the respondents is the unequivocal submission advanced by the advocates appearing for the petitioners. In addition to this, it is further submitted that rule 11 of the FTT Rules existed on the statute right from 11th June, 1979, whereas subsections (3), (4) and (5) of section 38 were substituted for the original subsection (3) by the Finance Act (32 of 1994). At that time it was expected on the part of the legislature to amend rule 11 of the FTT Rules. Since there is omission to amend rule 11, a legislative casus omissus cannot be supplied by process of judicial interpretation. It is, thus, urged that subsection (3) of section 38 cannot be used against the petitioners to impose penalty for late payment of FTT.

The High Court after referring to several cases, noted, "it is clear that a delegated legislation would have to be read in the context of the primary statute under which it is made and, in case of any conflict, it is primary legislation that will prevail."

Keeping in mind the aforesaid well settled principles of rule of interpretation, if one turns to section 38(3) of the Act, in contrast to rule 11 of the FTT Rules, it is not difficult to notice that the said rule runs contrary to the provision of the Act. There is a clear conflict between the proviso to rule 11 and section 38(3), the substantive provision of the Act. Reconciliation thereof is not possible. Subsection (3) of section 38 of the Act is a leading provision which by no stretch of imagination can be said to be or treated as subordinate provision. The subordinate provision must give way to the leading provision of the Act. Rule being subordinate legislation cannot override the provision of primary legislation. In this view of the matter, the submission advanced on behalf of the petitioners that the penalty must be in consonance with proviso to rule 11 of the FTT Rules and not in line with section 38(3) of the Act is without any substance. The submission advanced by Mr.Sridharan (counsel) that legislative casus omissus cannot be supplied by the Court is misplaced since this court is only giving primacy to primary provision of the primary legislation while upholding minimum penalty imposed.

The High Court further observed,

The provision of Chapter V of the Act in general and section 38(3) in particular provides that every carrier or other person, who fails to pay the FTT to the credit of the Central Government under subsection (2) of section 35, in addition to payment of such tax and the interest leviable thereon, is made liable to pay penalty. The said provision shows the mandatory nature of payment of liability. The use of the word "shall" in the statute, ordinarily speaking, means the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used, which would justify departure from that meaning. There is nothing in the language of the provision of section 38(3) which would justify any departure. On the other hand, section 38(3) makes it abundantly clear that if the carrier or any other person fails to pay the FTT to the credit of the Central Government within fifteen days as specified, the penalty must follow, which shall not be less than one-fifth of the amount of FTT. It is well settled that when the consequences of the failure to comply with the prescribed requirement is provided by the statute itself, there can be no manner of doubt that such statutory requirement must be interpreted as mandatory.

If we turn to the statutory provisions and the scheme of the foreign travel tax and collection thereof, section 35 of the Act creates liability to collect tax and payment thereof to the credit of the Central Government. Section 35A provides for payment of interest for default in payment of FTT, whereas section 38 provides for penalty in case of nonpayment of FTT within a prescribed time frame, subject to compliance of the principles of natural justice. Both sections operate in different contingencies.

Further more, the question as to whether mens rea is essential ingredient or not depends upon the nature of the right of the parties and the purpose of penalty for which penalty is sought to be imposed. Section 38 of the Act nowhere fastens criminal liability. The default or failure to pay is nothing, but failure or default to comply with the statutory civil obligations provided under the Act and the rules made thereunder. The penalty leviable under ChapterV or under section 38 is penalty in case of default or failure of statutory obligation or in other words for breach of civil obligation. In the provisions engrafted under ChapterV of the Act, there is no element of any criminal aspect as is generally contemplated under criminal proceedings. Therefore, there is no need to establish proof of criminal motive or any mens rea on the part of the defaulter. It is not an essential element for imposing penalty under the Act and rules framed thereunder.

As already noticed, each petitioner was served with the show cause notice. They were given opportunity of hearing. The adverse circumstances were brought to their notice. They were heard and thereafter, by reasoned order imposing penalty is passed against on each of the petitioners. The petitioners have availed opportunity of appeal and revision before the competent authorities provided under the Act. All the three different authorities have passed reasoned orders in consonance with the provisions of the Act following principles of natural justice.

The sole question that arises for consideration in the present petitions, is: whether the authorities below were justified in imposing and sustaining penalty in consonance with subsection (3) of section 38 of the Act ignoring proviso to rule 11 of the FTT Rules. The breach of civil obligation against each petitioner has been established, which was sufficient to attract penalty in the nature of fine under the provisions of the Act irrespective of the fact whether or not the contravention made by the defaulter was with any guilty intention.

It is seen that the respondents, in all cases, have admitted violation of the provisions of the Act by making late deposits. Subsection (3) of section 38 of the Act provides that every carrier or other persons who fails to pay FTT to the Central Government under section 35(2) shall be in addition to payment of such tax and interest leviable thereon be liable to pay penalty which shall not be less than one-fifth but which may extend to three times of the amount of the tax not so paid to the credit of the Central Government. The factual matrix in the cases in hand demonstrate several instances of delayed payment, short or nonpayment of the FTT apart from the lapses committed by the carriers in filing returns. It is, thus, clear that the delayed payment or rather nonpayment of the part of the FTT within the prescribed period is an admitted fact in all these petitions.

One more submission advanced by the advocates appearing for the petitioners is that power to impose penalty under section 38(3) of the Act is exercisable only in case of "failure to pay the tax" and not where there is only a delay in the payment of tax. According to them, "failure to pay" arises only where no payment has at all been made prior to the issuance of the demand notice and does not arise where a payment has been made, albeit belatedly. In other words, mere delay in payment cannot be within the sweep of "failure to pay". Hence delayed payment does not attract penalty.

The High Court held that the said submission is devoid of any substance.

" Failure to pay" means nonpayment. The meaning of nonpayment, as given in the Black's Law Dictionary, is:

" Failure to deliver money or other valuables, esp. when due in discharge of an obligation.

The concept of failure to pay can be quoted with nonpayment. Nonpayment is nothing but failure to pay when due. As per the provisions of the Act, amount of FTT collected becomes due within fifteen days from the date of collection thereof. Failure to pay within this prescribed time frame would mean nonpayment or failure to pay. If any person fails to pay within the statutory period of fifteen days, then such person is well within the sweep of the words "failure to pay". Once the period of fifteen days is over and breach in payment of tax is committed, then it is immaterial when the defaulter in future is making the payment. Had there been no minimum penalty prescribed under subsection (3) of section 38 of the Act, it would have been open for the adjudicating authority to consider the conduct of the defaulter and the extent of delay taking into account the extenuating circumstances while imposing penalty. But once the statute prescribes the minimum penalty without giving any discretion in favour of the adjudicating authority, then one has to go by the provisions of the Act.

The High Court further held, "This Court while exercising writ jurisdiction has only to consider whether or not power to impose penalty has been exercised in accordance with the provisions of the Act and that the decision making process is in accordance with law. Once the Court comes to the conclusion that there is no fault on the part of the adjudicating authority either in complying with the provisions of the Act or in the decision making process, then this Court would be justified in refusing to interfere with the impugned orders. "

Higher Penalty on Remand? The petitioner has urged that it was not open for the adjudicating authority to enhance the quantum of penalty while considering the show cause notice after its remand by the appellate authority to the adjudicating authority. The High Court found the submission without any merit. If one goes through the order of remand, one would find that it was not a limited remand. The remand was to enable the adjudicating authority to consider all the issues after affording opportunity of personal hearing to the petitioner. The first orderinoriginal dated 14th June, 1999 was in breach of principles of natural justice. Consequently, it was set aside, that too, at the request of the petitioner. The show cause notices were restored to the file of the adjudicating authority for consideration afresh. It was not a limited remand. In that view of the matter, it was open for the adjudicating authority to enhance the amount of penalty in consonance with the provision of subsection (3) of section 38 of the Act. Thus, submission made in this behalf holds no water.